On August 7, 2026, the Lok Sabha passed the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, three days after the Rajya Sabha cleared it on August 3. With Parliament's approval now complete, the Bill only awaits Presidential assent to become law — and it takes direct aim at one of the oldest, most persistent complaints in Indian business: buyers who simply don't pay MSMEs on time.
If you run a small manufacturing unit, a proprietorship supplying to a larger company, or you're a CA/consultant advising such clients, this amendment will eventually touch your working capital planning, your Section 43B(h) tax compliance, and your dispute resolution strategy. Here's the full picture.
1. The Background: Why Was a Law for MSME Payments Needed in the First Place?
MSMEs contribute roughly a third of India's GDP and are the country's largest employer after agriculture. But they share one structural weakness: weak bargaining power against large buyers. A small supplier rarely has the leverage to insist on 30-day payment terms from a large corporate or a government department — and chasing overdue invoices through ordinary civil courts (which can take years) is simply not viable for a business running on thin margins.
To fix this, Parliament enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Its delayed-payment framework (Sections 15–24) did three key things:
- Mandated payment timelines: Buyers had to pay within the period agreed in writing, and in no case beyond 45 days from the date of acceptance of goods/services.
- Penal interest: Any delay beyond 45 days attracted compound interest at 3× the RBI bank rate, and this interest is non-deductible as a business expense under the Income Tax Act.
- MSEFC mechanism: It created the Micro and Small Enterprises Facilitation Council (MSEFC) in every state — a quasi-judicial body meant to conciliate and, failing that, arbitrate disputes over delayed payments, so MSMEs wouldn't have to go to regular courts.
- Later, Section 43B(h) was inserted into the Income Tax Act (effective FY 2023-24), disallowing a buyer's deduction for any amount payable to a micro or small supplier that remains unpaid beyond the 45-day limit at year-end — a provision most CAs have had to actively build into tax audit checklists.
2. Where the 2006 Framework Fell Short
Two decades on, the gaps became obvious:
- MSEFCs were overwhelmed and inconsistent. Case pendency ran into lakhs, with settlements often taking years — defeating the very purpose of a "fast-track" council. Composition and functioning varied widely from state to state.
- Award enforcement was weak. Even after an MSE won an arbitral award, buyers routinely challenged it in court under Section 34 of the Arbitration Act, and payment could be stalled indefinitely while the appeal was pending — with no interim relief for the supplier.
- Jurisdictional rigidity. A supplier often had to pursue a claim in the buyer's location rather than their own, adding cost and inconvenience.
- No integration with the digital financing ecosystem — receivables discounting via TReDS (Trade Receivables Discounting System) existed, but large public-sector buyers weren't mandated to use it.
- Disproportionate criminal exposure for minor procedural/registration defaults discouraged formalisation rather than encouraging it.
3. What the 2026 Amendment Actually Changes
Issue under MSMED Act, 2006 Change under the 2026 Amendment
No mandatory digital settlement channel for PSU buyers
New Section 15A: Every Central Public Sector Enterprise (CPSE) must settle MSME procurement invoices through TReDS; Centre/States empowered to extend this to other PSUs and public bodies
Slow, inconsistent MSEFC dispute resolution
Section 18 amended — mediation must conclude, and if it fails, the matter must go to arbitration within 30 days; mediation itself is time-bound (reports suggest a 90-day outer limit)
Buyer's location decided jurisdiction, disadvantaging suppliers
MSEFC can now hear a case based on where the supplier is registered, regardless of where the buyer is located
Awards could be stalled indefinitely via Section 34 court challenges
Courts must now direct payment of at least 50% of the awarded amount if a challenge to the award remains pending beyond six months
Rigid, uniform MSEFC structure across states
States get flexibility to decide MSEFC composition and set up multiple councils (district-level, sector-specific, etc.) for faster, localised disposal
No formal provision for virtual hearings
New Section 18(6) enables an online dispute resolution (ODR) mechanism — mediation and arbitration via audio-video/electronic means
Minor defaults (e.g., registration/reporting lapses) could trigger criminal liability
Shifted to a graded administrative penalty regime — warnings and monetary fines from ₹1,000 up to ₹1,00,000 instead of prosecution
4. The Government's Stated Intention
The Statement of Objects accompanying the Bill frames it as an effort "to align the MSME Development Act, 2006 with the changing MSME landscape, to enhance the Ease of Doing Business, and bring trust-based regulations in the MSME ecosystem." MSME Minister Jitan Ram Manjhi pointed to credit disbursed to MSMEs rising from about ₹10 lakh crore in 2014-15 to over ₹38.35 lakh crore currently, and CGTMSE credit guarantees rising from ₹3.14 lakh crore (2000–2022) to over ₹10.47 lakh crore in just the last four years, as evidence of a sector the government wants to keep de-risking and formalising.
Read together, three intentions stand out:
- Liquidity first — mandatory TReDS routing for CPSEs is a direct plumbing fix to get cash into MSME accounts faster, rather than relying only on after-the-fact dispute resolution.
- Speed over perfection in dispute resolution — hard timelines (30-day arbitration referral, 6-month interim payment trigger) prioritise getting some money to the MSME quickly over waiting for a "final" resolution.
- Decriminalising minor compliance — consistent with the broader Jan Vishwas (trust-based governance) theme running through recent Indian legislative reform, moving small, non-fraudulent lapses out of the criminal justice system and into a fines-based track.
5. Practical Angle for Businesses and Advisors
- Suppliers to CPSE should get TReDS-registered now — this will become the default ssettlement route rather than an optional financing tool.
- Buyers (including private companies) should revisit AP ageing and MSME vendor identification, since Section 43B(h) tax disallowance risk and the amended MSEFC timelines will now move faster than before — a delayed payment can reach an enforceable interim-award stage sooner.
- MSEFC registration and documentation discipline (Udyam registration, written purchase orders with clear payment terms) becomes more important, since jurisdiction now follows the supplier and speed depends on clean paperwork.
- Watch whether the final notified Act extends delayed-payment protection to medium enterprises — as of the Bill's passage, this protection largely still covers only micro and small enterprises, a gap several commentators have flagged.
6. The Open Question
The law fixes the rules; it doesn't automatically fix the backlog. MSEFCs across India already have a pending caseload running into lakhs of applications, and reports suggest dues potentially worth several lakh crore rupees are locked up. Giving states flexibility to create more councils and pushing mediation online is a step forward, but it will only work if it's backed by adequate staffing, technical member appointments, and consistent minimum standards across states — otherwise "faster on paper" won't translate to "faster in practice."
This piece is a general explainer based on the Bill as passed by both Houses of Parliament; specific procedural details (e.g., exact mediation/arbitration timelines) should be verified against the final Act once notified and its accompanying rules are published.
Sources:
Business Standard, "Rajya Sabha passes MSME bill to speed up payments, dispute resolution" (Aug 3, 2026) — https://www.business-standard.com/india-news/rajya-sabha-passes-msme-bill-to-speed-up-payments-dispute-resolution-126080300790_1.html
Business Standard, "Lok Sabha passes MSME bill to tackle delayed payments without debate" (Aug 7, 2026) — https://www.business-standard.com/india-news/lok-sabha-passes-msme-bill-to-tackle-delayed-payments-without-debate-126080700876_1.html
Zee Business, "Rajya Sabha passes MSME Development (Amendment) Bill, 2026 to tackle delayed payments, ease dispute resolution" — https://www.zeebiz.com/economy-infra/news-rajya-sabha-passes-msme-development-amendment-bill-2026-to-tackle-delayed-payments-ease-dispute-resolution-399841/amp
Press Information Bureau, Ministry of MSME, "Public Procurement Policy for Micro and Small Enterprises" (25% mandate, sub-targets, FY23-24 achievement of 36.06%/₹82,630.38 crore) — https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2040253
SCC Online (SCC Times), "MSMED Act, 2006, Public Procurement Policy, 2012 and its Relevance during the 4th Industrial Revolution" (358 reserved items, L1+15% price-preference rule) — https://www.scconline.com/blog/post/2022/08/24/msmed-act-2006-public-procurement-policy-2012-and-its-relevance-during-the-4th-industrial-revolution/
Development Commissioner, Ministry of MSME (DCMSME), Public Procurement Policy — FAQs (confirms the Policy applies only to Central Ministries/CPSEs, not State Governments/PSUs) — https://www.dcmsme.gov.in/NewFAQs01022022.pdf
Lexology / Fox Mandal, "Promise vs. Practice in MSE Procurement" (Dec 2025) — covers the Lifecare Innovations Pvt. Ltd. v. Union of India, 2025 SCC OnLine SC 436 ruling and implementation gaps — https://www.lexology.com/library/detail.aspx?g=9535d07b-ff67-41e6-9d95-4dbc54a963b6
Sambandh Portal, Ministry of MSME, About Public Procurement Policy — https://sambandh.msme.gov.in/PPP_about.aspx